There is an exemption from the California Lender Licensing Act for a person making a single business loan in a rolling 12-month period about to “sunset” in California, affecting people who have relied on the exemption, including when structuring transactions through SPVs. .
As lenders likely know, California has a comprehensive lender licensing law called the California Finance Act (CFL) that requires anyone working in California making consumer or business loans to have a license as a “financial lender” from the California Department of Defense Finance and innovation, unless an exception to the license applies.
The CFL includes many licensing exemptions, primarily for people authorized under other laws, such as banks. However, the exemption that does not require another license that was significant for some transactions—including commercial real estate projects and other specialized financing transactions, such as those using the federal New Markets Tax Credit Program—is the exemption provided in Section 22050.5 of the CFL, which states However, the CFL “does not apply to any person who does not make more than one loan in a twelve-month period if such loan is a business loan as defined in the CFL.” This exemption has been beneficial to many lenders, including, for example, those who created an SPV that includes a specific California-related project, which then offers the SPV a single business loan.
Section 22050(e) of the CFL provides for a separate exemption for a person who makes five or fewer business loans in a rolling 12-month period, provided that the loans are “occasional to the business of the person relying on the exemption.” Although the greater number has been beneficial to some people, including venture capital firms and others who primarily make equity investments, this exemption is not available to special purpose firms set up to offer a single loan, since the only business of these The special purpose company is lending.
The “five or less” exemption was created by modifying the existing exemption that applies to a single loan and does not contain the incidental qualification. Section 22050.5 was added to the CFL in 2017 to address what was likely the inadvertent repeal of the SPV exemption through these changes. Unfortunately, Section 22050.5 states that the exemption for a person who provides one business loan within a 12-month period “remains in effect only until January 1, 2022, and as of that date is rescinded.” To date, Section 22050.5 has not been extended.
why does it matter
As a result of this “time to end” provision, beginning in 2022, lenders who previously relied on the waiver to make business loans in California, including with respect to SPVs that are set up to make a single loan, will need to consider licensing under the CFL, the possibility of applying A limited number of other licensing exemptions, or other structures that solve the licensing problem.
The authors of this alert are happy to discuss the impact of canceling the exemption on lenders, including possible alternative waivers or structures to resolve the licensing problem, and the possibility of seeking “legislative reform” in 2022 to restore the beneficial single-purpose special loan forgiveness.